1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ____TO ____ .
COMMISSION FILE NUMBER: 0-10370
ANDATACO, INC.
--------------------------
formerly IPL Systems, Inc.
(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 04-2511897
------------------------- ----------------
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10140 MESA RIM RD., SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices and Zip Code)
(619) 453-9191
(Registrant's Telephone Number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes [X] No [ ]
As of June 5, 1998 there were 23,819,399 shares of the Registrant's common
stock, $0.01 par value, issued and outstanding.
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ANDATACO, INC.
FORM 10-Q INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1.Consolidated Financial Statements*
Consolidated Balance Sheet at April 30, 1998 (unaudited)
and October 31, 1997 3
Consolidated Statement of Operations (unaudited) for the
three-month and six-month periods ended April 30, 1998 and 1997 4
Consolidated Statement of Cash Flows (unaudited) for the
six-month periods ended April 30, 1998 and 1997 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 4.Submission of Matters to a Vote of Security Holders 13
Item 6.Exhibits and Reports on Form 8-K 13
Signatures
* On April 8, 1998, the Company held its Annual Meeting of Shareholders. At the
meeting, the shareholders approved the amendment of the Company's Articles
of Organization to change the name of IPL Systems, Inc. to Andataco, Inc.
Concurrent with that change, the Company also changed the name of its wholly
owned subsidiary ANDATACO to ANDATACO of California.
3
PART I - FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
ANDATACO, INC.
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
APRIL 30, OCTOBER 31,
1998 1997
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash $ 20,000 $ 41,000
Accounts receivable, net 10,695,000 10,846,000
Inventories 6,247,000 7,458,000
Other current assets 452,000 353,000
------------ ------------
Total current assets 17,414,000 18,698,000
Goodwill, net 6,829,000 7,665,000
Equipment and improvements, net 3,804,000 3,599,000
Other assets 51,000 27,000
------------ ------------
$ 28,098,000 $ 29,989,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,857,000 $ 7,660,000
Accrued expenses 3,592,000 4,202,000
Deferred revenue 2,220,000 1,554,000
Current portion of note payable -- 113,000
------------ ------------
Total current liabilities 12,669,000 13,529,000
------------ ------------
Long-term liabilities:
Bank line of credit 6,106,000 6,500,000
Note payable, less current portion -- 28,000
Shareholder loan 5,196,000 5,196,000
------------ ------------
Total long-term liabilities 11,302,000 11,724,000
------------ ------------
Shareholders' equity:
Common stock 238,000 238,000
Additional paid in capital 10,107,000 10,107,000
Accumulated deficit (6,218,000) (5,609,000)
------------ ------------
Total shareholders' equity 4,127,000 4,736,000
------------ ------------
$ 28,098,000 $ 29,989,000
============ ============
See notes to unaudited consolidated financial statements.
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ANDATACO, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
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THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
----------------------------------- -----------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Sales $ 20,996,000 $ 21,540,000 $ 42,756,000 $ 47,037,000
Cost of sales 14,325,000 16,953,000 29,300,000 36,458,000
------------ ------------ ------------ ------------
Gross profit 6,671,000 4,587,000 13,456,000 10,579,000
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and
administrative 6,037,000 4,459,000 12,438,000 9,669,000
Rent expense to shareholder 83,000 83,000 166,000 166,000
Research and development 473,000 150,000 914,000 614,000
------------ ------------ ------------ ------------
Total operating expenses 6,593,000 4,692,000 13,518,000 10,449,000
------------ ------------ ------------ ------------
Income (loss) from operations 78,000 (105,000) (62,000) 130,000
Interest expense 139,000 111,000 288,000 345,000
Interest expense to shareholder 117,000 117,000 234,000 228,000
------------ ------------ ------------ ------------
Loss before income
tax provision (178,000) (333,000) (584,000) (443,000)
Income tax provision 11,000 6,000 25,000 6,000
------------ ------------ ------------ ------------
Net loss $ (189,000) $ (339,000) $ (609,000) $ (449,000)
============ ============ ============ ============
Loss per share:
Basic $ (0.01) $ (0.02) $ (0.03) $ (0.03)
============ ============ ============ ============
Diluted $ (0.01) $ (0.02) $ (0.03) $ (0.03)
============ ============ ============ ============
Shares used in computing
net loss per share:
Basic 23,819,399 18,078,381 23,819,399 18,078,381
============ ============ ============ ============
Diluted 23,819,399 18,078,381 23,819,399 18,078,381
============ ============ ============ ============
See notes to unaudited consolidated financial statements.
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ANDATACO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
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SIX MONTHS ENDED
APRIL 30,
----------------------------------
1998 1997
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Cash flows from operating activities:
Net loss $ (609,000) $ (449,000)
Adjustments to reconcile net loss to cash
provided by (used in) operating
activities:
Depreciation and amortization 769,000 300,000
Amortization of goodwill 836,000 --
Changes in assets and liabilities:
Accounts receivable 151,000 161,000
Inventories 913,000 374,000
Other assets (123,000) (192,000)
Accounts payable (803,000) (1,136,000)
Accrued expenses (610,000) 704,000
Deferred revenue 666,000 101,000
------------ ------------
Net cash provided by (used in) operating activities 1,190,000 (137,000)
------------ ------------
Cash flows from investing activities:
Payments for purchases of property and equipment (676,000) (301,000)
------------ ------------
Net cash used in investing activities (676,000) (301,000)
------------ ------------
Cash flows from financing activities:
Payments under bank line of credit agreement, net (394,000) (53,000)
Proceeds from shareholder loan -- 269,000
Payments on note payable (141,000) (108,000)
------------ ------------
Net cash (used in) provided by financing activities (535,000) 108,000
------------ ------------
Net change in cash (21,000) (330,000)
Cash at beginning of period 41,000 765,000
------------ ------------
Cash at end of period $ 20,000 $ 435,000
============ ============
See notes to unaudited consolidated financial statements.
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ANDATACO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 1 - BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
The accompanying unaudited consolidated financial statements of ANDATACO, Inc.
("ADT" or the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the Consolidated
Financial Statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended October 31, 1997. In the opinion of management,
the accompanying unaudited consolidated financial statements contain all
adjustments, consisting of only normal recurring items, necessary for a fair
presentation of the Company's financial position as of April 30, 1998 and its
results of operations for the three-month and six-month periods ended April 30,
1998 and 1997. The interim financial information contained herein is not
necessarily indicative of the results to be expected for any other interim
period or the full fiscal year ending October 31, 1998.
NOTE 2- BUSINESS COMBINATION
On June 3, 1997 (the "Closing Date"), ADT (formerly IPL Systems, Inc.) completed
a business combination with ANDATACO of California (formerly ANDATACO), whereby
ANDATACO of California was merged with a wholly-owned subsidiary of ADT (the
"Merger"). Under the terms of the merger agreement, the shareholders of ANDATACO
of California were issued a total of 18,078,381 shares of ADT Class A Common
Stock in exchange for all outstanding shares of capital stock of ANDATACO of
California. Although as a legal matter the Merger resulted in ANDATACO of
California becoming a wholly-owned subsidiary of ADT, for financial reporting
purposes the Merger was treated as a recapitalization of ANDATACO of California
and an acquisition of ADT by ANDATACO of California (reverse acquisition). The
financial reporting requirements of the Securities and Exchange Commission
require that the financial statements reported by ADT subsequent to the Merger
be those of ANDATACO of California, which include the results of operations of
ADT from the Closing Date.
The acquisition of ADT by ANDATACO of California was accounted for using the
purchase method. Accordingly, the purchase price was allocated to the estimated
fair market value of identifiable tangible and intangible assets acquired and
liabilities assumed. Based upon an independent valuation, the Company allocated
$2,400,000 to acquired in-process research and development for which there is no
future alternative use and $400,000 to existing proprietary technology for which
technological feasibility had been established. As required by generally
accepted accounting principles, the amount allocated to in-process research and
development was recorded as a one-time charge to operations and the amount
allocated to existing technology was amortized over its estimated useful life.
The excess of the purchase price over the identifiable net assets acquired of
$8,362,000 was recorded as goodwill and is being amortized on a straight-line
basis over its estimated useful life of five years.
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ANDATACO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 3 - NET LOSS PER SHARE
The Company has adopted Statement of Financial Accounting Standard (FAS) No.128,
"Earnings Per Share." Basic earnings per share ("EPS") is calculated by dividing
the income available to common shareholders by the weighted average number of
common shares outstanding for the period, without consideration for common stock
equivalents. Diluted EPS is computed by dividing the income available to common
shareholders by the weighted average number of common shares outstanding for the
period in addition to the weighted average number of common stock equivalents
outstanding for the period. Net income remains the same for the calculations of
basic EPS and diluted EPS. The denominator for the diluted EPS calculation
differs from that of basic EPS by the number of common stock equivalents
outstanding for each period. The Company has restated EPS for prior periods
concurrent with the adoption of FAS 128. The number of shares of the Company's
common stock outstanding immediately before the Merger has been treated as
issued at the Merger date. Shares issuable upon exercise of outstanding stock
options have been excluded from the diluted EPS computation as their effect
would be antidilutive.
NOTE 4 - INVENTORIES
APRIL 30, OCTOBER 31,
1998 1997
------------ ------------
(Unaudited)
Inventories are comprised of the following:
Purchased components $ 4,864,000 $ 5,541,000
Work in progress 288,000 125,000
Finished goods 1,095,000 1,792,000
------------ ------------
$ 6,247,000 $ 7,458,000
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements included elsewhere within this quarterly
report. Fluctuations in annual and quarterly results may occur as a result of
factors affecting demand for the Company's products such as the timing of the
Company's and competitors' new product introductions and upgrades. Due to such
fluctuations, historical results and percentage relationships are not
necessarily indicative of the operating results for any future period.
The discussion contained in this report may contain forward-looking statements
based on the current expectations of the Company's management. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected. Factors that could cause or
contribute to such differences include, but are not limited to, fluctuations in
the Company's operating results, continued new product introductions by the
Company, market acceptance of the Company's new product introductions, new
product introductions by competitors, technological changes in the computer
storage industry and other factors referred to herein including, but not limited
to, the factors discussed below and in the Company's Form 10-K. Readers are
cautioned not to place undue reliance on these forward-looking statements which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
which may be made to reflect events or circumstances occurring after the date
hereof or to reflect the occurrence of unanticipated events.
OVERVIEW
ADT designs, manufactures, and distributes storage solutions based on its
Application-Specific Architecture ("ASA") for Windows NT and UNIX environments.
The Company develops products to meet the individual performance and
availability profiles of storage-intensive applications in its target markets.
The Company's open-architecture solutions include Redundant Array of Independent
Disks ("RAID") and RAID-ready disk arrays; tape backup and restore products; and
web storage management and other storage management utilities, remote mirroring
and disaster recovery software. These products support multiple server
platforms, including Sun Microsystems, Hewlett-Packard, Silicon Graphics, Inc.
and various NT systems. The Company distributes internally developed products,
as well as products from other manufacturers through direct, indirect and
original equipment manufacturer ("OEM") sales and service channels throughout
the world. The Company backs its products with maintenance and technical
support. In addition it provides customized consulting services programs.
The GigaRAID Series is a family of RAID and RAID-ready disk and tape storage
systems that are combined with the Company's proprietary, award-winning modular
packaging architecture, Enterprise Storage Packaging ("ESP"), to create complete
storage solutions. The GigaRAID/HA provides high performance and availability
for OLTP/Database applications characterized by small block/random data
processing. The GigaRAID/FT is fully-redundant and configurable for either large
block, sequential applications such as video, data-warehousing, and seismic
analysis, or small block, random applications such as OLTP/Database, financial,
and technology development. Late in the second quarter of fiscal 1998 the
Company introduced the GigaRAID/FC fibre channel products. The new GigaRAID/FC
Series offers high availability, performance and capacity within server-based
enterprise network environments, including high performing SCSI and Fibre
products for the gas exploration, technology development, video,data warehouse
and OLTP/Database environments. Other GigaRAID Series products,including the
GigaRAID/SX, offer high performance and availability for certain data warehouse,
seismic processing and video applications characterized by large block,
sequential processing.
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Historically, the reseller business or the sale of third party mass storage
products accounted for the majority of the Company's revenues, representing 100%
of revenues in fiscal 1995 and declining to 37.2% and 34.6% in fiscal 1996 and
1997, respectively. Although the Company plans to continue to sell third party
products, management's strategy is to focus increased resources on the design,
development, manufacturing and marketing of GigaRAID products. For the six
months ended April 30, 1998 and 1997, revenue from sales of GigaRAID products
represented 57.9% and 39.7% of total revenue, respectively.
RESULTS OF OPERATIONS
The following table sets forth items in the Company's statement of operations as
a percentage of net sales for the periods presented. The data has been derived
from the unaudited condensed consolidated financial statements.
Three Months Ended Six Months Ended
April 30, April 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 68.2 78.7 68.5 77.5
------------ ------------ ------------ ------------
Gross profit 31.8 21.3 31.5 22.5
Operating expenses:
Selling, general and administrative 28.8 20.7 29.1 20.6
Rent expense to shareholder 0.4 0.4 0.4 0.4
Research and development 2.3 0.7 2.1 1.3
------------ ------------ ------------ ------------
Total operating expenses 31.5 21.8 31.6 22.3
------------ ------------ ------------ ------------
Income (loss) from operations 0.3 (0.5) (0.1) 0.2
Interest expense 1.2 1.1 1.2 1.2
------------ ------------ ------------ ------------
Loss before income tax provision (0.9) (1.6) (1.3) (1.0)
Provision for income taxes 0.1 -- 0.1 -_
------------ ------------ ------------ ------------
Net loss (1.0)% (1.6)% (1.4)% (1.0)%
============ ============ ============ ============
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Results of Operations - Second Quarter of Fiscal 1998 compared to Second Quarter
of Fiscal 1997
Sales. Sales for the three months ended April 30, 1998 were $20,996,000, a
decrease of 2.5% from sales of $21,540,000 for the same period in the prior
year. The decrease was primarily attributable to a decrease in sales of older
mass storage products including RAID Liteand RAPID-Tape, as well as lower sales
in the GigaRAID 8000/3000 series of JBOD Disk and JBOT Tape. Mass storage
product sales were $1,116,000 in the second quarter of fiscal 1998 compared to
$6,675,000 in the second quarter of fiscal 1997. This decrease was partially
offset by an increase in newer GigaRAID product sales including GigaRAID FT and
GigaRAID FC. Sales of newer GigaRAID products were $12,229,000 in the second
quarter of fiscal 1998 compared to $7,835,000 in the second quarter of fiscal
1997. The decrease in older mass storage product sales is in line with the
Company's strategy to focus increased resources on newer GigaRAID products which
produce higher margins. This is consistent with the Company's transition towards
"owned solutions" - strategic technologies designed in-house to create
technical, time-to-market and gross margin advantages. By combining internal
technology with selected products manufactured by its distribution and
development partners, the Company provides a strong, sophisticated product line
targeted to fast-growing segments of the open systems storage market.
Gross Profit. Notwithstanding the decline in sales, gross profit in the second
quarter of fiscal year 1998 was $6,671,000, representing approximately 31.8% of
revenues, compared to $4,587,000 in the second quarter of fiscal 1997,
representing approximately 21.3% of sales. The increase in gross profit
percentage was due primarily to the shift in product mix from quarter to
quarter. The Company's newer GigaRAID product family sales accounted for 58.2%
of revenues for the second quarter of fiscal 1998 as compared to 36.4% of
revenues in the second quarter of fiscal 1997. The Company's GigaRAID product
family has a higher average gross margin as compared to mass storage and other
third party products. In addition, there was a reduction in costs of components
used to manufacture products in the second quarter of fiscal 1998 compared to
the second quarter of fiscal 1997.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses consist primarily of the salaries, commissions and benefits of
sales, marketing and customer support personnel and administrative and corporate
services personnel, as well as consulting, advertising, promotion, and certain
Merger related expenses (i.e., goodwill amortization). SG&A expenses were
$6,037,000 and $4,459,000 for the three months ended April 30, 1998 and 1997,
respectively. The increase in the current period's SG&A expenses over such
expenses incurred in the comparable period of the prior fiscal year primarily
represents the addition of sales executives and technical service, marketing and
management personnel intended to increase sales of the Company's products in all
channels. In addition, the increase in SG&A expenses was due to $418,000 of
goodwill amortization resulting from the Merger and an increase in depreciation
expense of approximately $207,000 related to the addition of fixed assets from
the Merger.
Research and Development. Research and development expenses consist primarily of
salaries, employee benefits, overhead and outside contractors. Such expenses
were $473,000 and $150,000 for the quarters ended April 30, 1998 and 1997,
respectively. The level of research and development expenses is in line with the
Company's strategy to continue to focus increased resources on design and
development of in-house products and differentiating technologies for which it
believes there is a need in the market. However, there can be no assurance that
product development programs invested in by the Company will be successful or
that products resulting from such programs will achieve market acceptance.
Interest Expense. The increase in interest expense of $28,000 or 25.2%, in the
second quarter of fiscal 1998 over the comparable period in fiscal 1997 is
primarily due to an increase in the outstanding portion of the Company's bank
line of credit.
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Results of Operations - First Six Months of Fiscal 1998 compared to First Six
Months of Fiscal 1997
Sales. Sales for the six months ended April 30, 1998 were $42,756,000, a
decrease of 9.1% from sales of $47,037,000 for the same period in the prior
year. The decrease was primarily attributable to a decrease in sales of older
mass storage products including RAID Lite and RAPID-Tape, as well as lower sales
in the GigaRAID 8000/3000 series of JBOD Disk and JBOT Tape. Mass storage
integrated product sales were $3,092,000 in the first six months of fiscal 1998
compared to $12,711,000 in the first six months of fiscal 1997. In addition,
third-party product sales decreased by $2,146,000 to $12,778,000 in the first
six months of fiscal 1998 compared to $14,924,000 in the first six months of
fiscal 1997. Although the Company experienced an increase in sales of GigaRAID
products of $6,088,000 over the same period in 1997, such increase was more than
offset by the decrease in the sales of older mass storage and other third-party
products. The decrease in older mass storage and third-party product sales is in
line with the Company's strategy to focus increased resources on the GigaRAID
product family which produce higher margins. This is consistent with the
Company's transition towards "owned solutions" - strategic technologies designed
in-house to create technical, time-to-market and gross margin advantages. By
combining internal technology with selected products manufactured by its
distribution and development partners, the Company provides a strong,
sophisticated product line targeted to fast-growing segments of the open systems
storage market.
Gross Profit. Notwithstanding the decline in sales, gross profit for the first
six months of fiscal year 1998 was $13,456,000, representing approximately 31.5%
of revenues, compared to $10,579,000 in the first six months of fiscal 1997,
representing approximately 22.5% of sales. The increase in gross profit
percentage was due primarily to the shift in product mix from period to period.
The Company's GigaRAID product family sales accounted for 57.9% of revenues for
the first six months of fiscal 1998 as compared to 39.7% of revenues in the
first six months of fiscal 1997. The Company's GigaRAID product family has a
higher average gross margin as compared to older mass storage and other third
party products. In addition, there was a reduction in costs of components used
to manufacture products in the first six months of fiscal 1998 compared to the
comparable period in fiscal 1997.
Selling, General and Administrative. SG&A expenses were $12,438,000 and
$9,669,000 for the six months ended April 30, 1998 and 1997, respectively. The
increase in the current period's SG&A expenses over such expenses incurred in
the comparable period of the prior fiscal year primarily represents the addition
of key sales executives and technical service, marketing and and management
personnel intended to increase sales of the Company's products in all channels.
In addition, the increase in SG&A was due to $836,000 of goodwill amortization
resulting from the Merger and an increase in depreciation expense of
approximately $409,000 related to the addition of fixed assets from the Merger.
Research and Development. Research and development expenses were $914,000 and
$614,000 for the first six months ended April 30, 1998 and 1997, respectively.
The level of research and development expenses is in line with the Company's
strategy to continue to focus increased resources on design and development of
in-house products and differentiating technologies for which it believes there
is a need in the market. However, there can be no assurance that product
development programs invested in by the Company will be successful or that
products resulting from such programs will achieve market acceptance.
Interest Expense. The decrease in interest expense of $51,000 or 8.9%, in the
first six months of fiscal 1998 over the comparable period in fiscal 1997 is
primarily due to the reduction in the outstanding portion of the Company's bank
line of credit.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of fiscal 1998, the Company generated $1,190,000 of
cash from operating activities. Included in this net change was a decrease of
$913,000 in inventories, and a reduction in trade accounts receivable of
$151,000, partially offset by a reduction in accounts payable of $803,000.
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12
Offsetting cash generated from operations was the reduction in the outstanding
portion of the Company's bank line of credit of $394,000 and payments for
purchases of capital equipment of $676,000.
On April 30, 1998, the Company replaced its existing credit facility with a new
facility with a new financial institution. The new credit facility permits the
Company to borrow the lesser of $15,000,000 or a percentage of eligible accounts
receivable and inventory ($9,755,000 available at April 30, 1998). As of April
30, 1998, the Company had $6,106,000 outstanding under this credit line. The
credit facility expires on April 30, 2001; consequently borrowings under this
line have been classified as long term.
The shareholder loan from the president and principal shareholder is unsecured,
due in June 2004, with interest payable monthly at 9 percent per annum. This
loan is subordinate to the bank line of credit.
The Company is currently satisfying all working capital and capital expenditure
requirements through internally generated cash flows from operations and
borrowings available on its credit facility. Management believes that its
financial position and available borrowings on its credit facility will be
sufficient to meet the operating requirements of its business for a period of at
least twelve months.
INCOME TAXES
Prior to the consummation of the Merger, ANDATACO of California elected to be
taxed under Subchapter S of the Internal Revenue Code of 1986, as amended, and
consequently all federal income taxes and most state taxes were paid directly by
its shareholders.
Concurrent with the Merger, ANDATACO of California changed its taxpayer status
from a Subchapter S Corporation to a Subchapter C Corporation. Effective with
that change, the Company transferred the amount of its accumulated deficit at
that date to additional paid in capital. Therefore, the Company's accumulated
deficit at April 30, 1998 includes losses solely incurred by the Company since
the Merger.
Because of the change in taxpayer status to a Subchapter C Corporation, the
Company is subject to federal and state income taxes. The tax provision is
calculated giving effect to the change of ANDATACO of California from a
Subchapter S Corporation to a Subchapter C Corporation, and the resultant
adjustments for federal and state income taxes, as if ANDATACO of California had
been taxed as a C Corporation rather than an S Corporation since inception. The
Company has recorded deferred tax assets and liabilities due to its change in
taxpayer status to a Subchapter C Corporation. The Company has recorded a
valuation allowance in full for deferred tax assets which, more likely than not,
will not be realized based on recent operating results.
The income tax provision recorded for the six-month period ended April 30, 1998
represents minimum state taxes for the period. No income tax provision or
benefit was recorded for the six-month period ended April 30, 1998 due to net
loss incurred during this period, which loss has not resulted in the recording
of an income tax benefit due to a full valuation allowance also being recorded.
No pro forma calculation of income tax is presented because as a Subchapter C
Corporation the Company would not have been liable for income taxes due to
losses sustained, which losses have not resulted in the recording of an income
tax benefit due to a full valuation allowance also being recorded.
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PART II - OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 8, 1998, the Company held its Annual Meeting of Shareholders. At the
meeting, the shareholders approved management's slate of directors and all four
additional proposals with the following vote distribution:
Broker
Item Affirmative Negative Withheld Non-Vote
---------- ---------- ---------- ----------
Election of Board of Directors
Harris Ravine 22,580,685 -- 59,511 --
W. David Sykes 22,580,685 -- 59,511 --
Cornelius McMullan 22,584,735 -- 55,461 --
Melville Straus 22,584,335 -- 55,861 --
Other Matters
1)Amend the Company's Articles
of Organization to change name
of Company to Andataco, Inc. 22,542,271 63,825 34,100 1,179,203
2)Amend the bylaws to set the
number of authorized shares
at 40,000,000 22,424,659 184,747 30,790 1,179,203
3)Increase the number of shares
issuable under the Company's
1997 Equity Incentive Plan 19,372,103 188,998 41,930 4,216,368
4)Reappoint Price Waterhouse LLP
as independent auditors for fiscal
year 1998 22,587,331 34,700 18,165 1,179,203
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Loan Agreement dated as of April 30, 1998 between Wells Fargo
Bank and the Company.
11.1 Computation of Loss per Common Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Andataco, Inc.
Date: June 15, 1998 By:/s/ Harris Ravine
-------------------------------
Harris Ravine
Chief Executive Officer
(on behalf of registrant and as
its principal executive officer)
Date: June 15, 1998 By:/s/ Richard A. Hudzik
-------------------------------
Richard A. Hudzik
Vice President of Finance and
Chief Financial Officer
(on behalf of registrant and as
its principal financial officer)
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